Consumer groups are worried financial institutions are licking their chops over a potential surge in bounced checks-and fee income-following the Oct. 28 implementation of the Check Processing for the 21st Century Act (Check 21).
But some experts question how quickly consumers will feel the loss of "float."
"I don't think most people expect any magic switch flipped on come Oct. 28 that will trigger a flood of imaging and possible substitute checks," said Kathy Thompson CUNA SVP-regulatory compliance. "The law doesn't mandate imaging, and since the great majority of credit unions already truncate, people with credit union share draft accounts are even less likely to feel the impact than bank customers."
But even if checks won't be bouncing off the walls on Oct. 28, that doesn't mean an increase in returned items isn't if the offing, suggested Joe Gillen, founding partner of Pinnacle Financial Strategies, Houston, which provides a variety of overdraft privilege programs to banks and credit unions.
"It's not going to happen overnight, but within the first six to eight months, most of the major financial institutions-say the top 25-will be exchanging images instead of paper, and that represents 70% of the check processing arena," Gillen offered. "We're projecting a 20% increase in bounced checks."
Consumers Union and the Consumer Federation of America have sent a joint letter to the nation's largest banks imploring them to adopt policies that will protect consumers from the potential unintended consequences of Check 21.
"Consumers should get ready for an October surprise from their banks when this new check processing law is implemented," said Gail Hillebrand, senior attorney with Consumers Union's West Coast office. "Banks will save billions under Check 21, but consumers stand to lose out unless banks adopt new policies to protect them."
The loss of float time could mean that by mid-2005 consumers could be bouncing almost seven-million more checks and paying an additional $170 million in fees each month, Consumers Union suggested.
The consumer groups aren't the only ones concerned. Even though CUNA's Thompson suggested that it's all but impossible to tell how quickly-or even how much-float will be eliminated, the consumer groups may have cause to be worried.
"I'm a little dismayed to see articles about how bankers feel that their fee income will increase because consumers won't understand the impact of electronic presentment on their float," she said in a compliance article she wrote, adding, "The great unknowns are how quickly and extensively will electronic imaging and presentment spread because of Check 21, how much float is really still in the system, and how many substitute checks will end up in consumers' hands."
Still, it's not as if consumers haven't gone through this before, Gillen advised, noting that the reduction of float has long been a goal. "The Federal Reserve has been moving toward the elimination of float since the 1970s," he commented, pointing to the introduction of direct presentment, ACH processing and a number of other moves that have cut down on float time through the years.
And if any financial institutions are salivating over a potential increase in bounced check fees, they're unlikely to reap any major rewards in the long term, he counseled.
"The problem with that income stream is that it will go away," Gillen said. "For one thing, consumers will learn that their checks are clearing faster, and they will change their behavior. But perhaps more importantly, consumers who get burned by this are not going to be happy, and 80% of unhappy consumers don't bother to complain to their bank-they simply leave it and find another one. Credit unions have a slightly different approach in how they deal with their members; they have always had their members' best interests at heart. Banks are starting to learn that this approach is just good business."
Michael Bates, retail products director at Scottsdale, Ariz.-based e-Funds agreed. "It really becomes a customer service issue," he advised. "The credit union owns the relationship with its members."
As for the recomendations of the consumer groups (outlined below), none of The Credit Union Journal's sources said they had heard from banks or credit unions (who weren't targeted to receive the Consumers Union/CFA letter) about whether they intend to adopt any of these policies.
